Outlook on the ASC Industry for 2014: Biggest Concerns & Best Strategies for Success

Several key aspects of healthcare reform legislation go into effect next year — including health insurance exchanges and the transition to ICD-10 — which will have a big impact on ambulatory surgery centers.

Consolidation within the industry and the push toward data gathering with electronic medical records has placed a heavy burden on ASCs, but industry leaders are cautiously optimistic about the future.

Biggest concerns

1. Employed physicians. Hospitals and health systems are hiring specialists and primary care physicians at a high rate in almost every market across the country, and oftentimes referrals are kept within the hospital or health system.

"This trend shrinks the number of physicians available to use the ASC," says Nick Newsad, senior associate with HealthCare Appraisers. "The employed surgeons may start doing all their cases at the employer's facility. Additionally, employed primary care specialists may provide coordinated care by referring to specialists in that network, which could impact the downstream referrals to specialists that do use the center."

2. ICD-10 conversion. Healthcare providers are working to make the switch to ICD-10 over the next year, which will be required in October 2014. The transition will take hours of coder and physician education, and experts predict a bottle-neck in claims processing during the initial implementation period.

"ICD-10 is a huge concern and I think we have to prepare for that," says Joe Zasa, JD, managing and founding partner of ASD Management. "I would reserve three months cash to get ready for the transition. We have to see how payers react and pay based on the ICD-10 changes."

He recommends beginning to set aside cash at the beginning of the year to have enough saved by October. "You can always distribute it out at the end of the year if it turns out the implementation is no big deal," says Mr. Zasa. "If it becomes a big deal, you have to have the cash."

3. High-deductible health plans. Americans are now enrolling in the health insurance exchanges where many plans are high-deductible. Employers are also offering higher deductible plans than many employees have seen in the past.

"The patient out-of-pocket costs seem to continue to rise the way plans are structured," says Mr. Newsad. "There are some concerns as to how many of the health plans that patients buy from the exchanges are high deductible; we suspect a large number will be. That will further exacerbate patient collection issues, which will become a bigger chunk of the revenue."

As small businesses, many surgery centers are also anxious to see whether they'll be able to offer benefits packages to their employees similar to the previous years. "There is a lot of speculation on the cost of health insurance going forward," says Mr. Newsad. "If the premiums go up, they might need to cut benefits and offer higher deductible plans."

4. Aging equipment. Many surgery centers developed during the late 1990s-early 2000s boom are now approaching the decade mark and much of the initial equipment purchased has reached the end of its usefulness.

"We are seeing more centers that need to replace their big dollar items," says Mr. Newsad. "Centers that may have had physicians leave since they opened or don't have good reimbursement rates may have difficulty funding these replacements."

Centers with consistent distribution over time can set aside extra cash for these replacements as they become necessary.

"When you start setting money aside to replace equipment, you might not have any profit coming off the business to the owners," says Mr. Newsad. "Your other option is to take out debt to finance these purchases. The partners have to decide whether they want to stop distributing or sell some of their ownership and bring in new surgeons to fuse some cash into the business to fund those replacements. There are a fair amount of valuations we do because there are a lot of necessary replacements and surgeons want to share that risk with additional owners."

Opportunities

In most markets ASCs remain the low-cost, high quality provider, and centers with the ability to capitalize on their status will be the most likely to preserve in the future, especially if hospitals are unable to sustain the physician salary packages and acquisition volume they've been offering over the past few years.

"There has been a bump in the road for ASCs with the hospital and health system acquisitions, but over the long term if they can create a sustainable model for healthcare delivery, they will succeed," says Mr. Newsad. "ASCs provide a fantastic service and being the low-cost provider is a great attribute to have."

Even as the healthcare landscape changes to become more integrated, there is room for adaptable centers to thrive. For example, many communities are seeing risk-sharing initiatives such as accountable care organizations sprout up, which are another opportunity.

There are around 400 ACOs in the United States today and some ASCs have successfully entered into their networks. The Medicare pilot ACOs are finishing their first year and collecting data on quality and cost initiatives, but it will still be a few years before their full impact is evident.

"Everyone is cognizant that that's going on and looking to see what the results are going to be," says Mr. Newsad. "In terms of valuation and acquisition sales opportunities, there are several deals going on and the market has continued to be strong."

Some of the changes in healthcare, such as the technology moving higher acuity cases into the outpatient setting, present another big opportunity for ASCs. "We are going to see more total joint replacements — total knees in particular — being done at surgery centers," says Mr. Zasa. "I think we are also going to see continued acceptance of spine procedures."

Key strategies

The stability of today's healthcare environment is uncertain as the rocky road toward healthcare reform implementation takes shape. Surgery center owners and administrators have always been cost-conscious, but even more attention is paid to cutting out extraneous spending today.

"I have definitely seen some ASCs take a hard look at their costs," says Mr. Newsad. "A few years ago, there were ASCs that bought staff lunch every day. I can't remember the last time I've seen one now."

Some of the key strategies owners and administrators are using today include:

• Deciding whether to outsource services such as billing, janitorial and management or bring them back in-house depending on the size and structure of the ASC;• Cutting open days for the center down to two to four days per week, or shortening the hours for operation each day to maximize the compact schedule;• Hiring part-time or per diem staff to reduce overtime hours.

"There are a lot of ASCs that aren't open ever day," says Mr. Newsad. "They don't seem to have trouble finding per diem staff or part time staff if the center is only open a few days per week. That's a very efficient way to operate your surgery center and maximize the return you have on your staff."

ASC owners will also benefit from having a good line of credit in place, says Mr. Zasa. "You don't want to suspend the system you have in place. Having back-ups makes sure you don't get into a pickle."

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